More About How Bankruptcy Can Really Help Even if It Doesn’t Write Off Every Debt
April 13, 2015
More examples of how bankruptcy actually works, and works well, even when a major debt can’t be discharged.
Take Control over the Amount of Your Monthly Payments.
The taxing authorities, support enforcement agencies, and student loan creditors have extraordinary power to take your money and your assets if you fall behind with them. Because of that tremendous leverage they have against you, you are to a large degree at the mercy of their demands and their rules. Chapter 13 to a large degree throws their rules out the window in your favor.
For example, assume you owe $18,000 to the IRS from the 2012 and 2013 tax years. Assume you have a steady job but one with income that leaves you with very little money to pay the IRS after paying out your very basic living expenses. The IRS calculates what you can afford to pay on a very slim budget, and generally doesn’t care what other creditors you owe. Even if you did not have unexpected expenses during the time you’re trying to pay off the IRS, coming up with the required amount every month may well be extremely difficult. But if your car or truck needs a major repair or you had unexpected medical expenses, keeping up those payments would become absolutely impossible.
In a Chapter 13 case, on the other hand, instead of a rigid mandatory monthly payment going to the IRS, how much it is paid each month is much more flexible in a Chapter 13 case. Your Chapter 13 payment plan allows your monthly payment that goes to all of your creditors to change based on what you can afford. You would be allowed to budget for vehicle maintenance and repairs, and medical costs, and other reasonable expenses, usually much more than the IRS would allow. And the amount that the IRS would receive from the monthly plan payment can shift and be delayed while certain other important creditors are paid ahead of the IRS. And if you had unexpected vehicle, medical, or other necessary expenses beyond their budgeted amounts, Chapter 13 has a mechanism for adjusting the original monthly payment. Throughout all this, you’d be protected from the IRS.
Stop Additional Interest, Penalties, and Other Costs.
Under the above facts, if you were not in a Chapter 13 case the IRS would be continuously adding interest and penalties to the debt, significantly increasing the total amount that would have to be paid to clear the debt, thus increasing how long it would take to pay off the tax debt.
Instead, under Chapter 13, unless the IRS has recorded a tax lien no additional interest is added from the minute the case is filed, and no additional penalties are added either. So not only do you have more time to pay off the tax debt, and much more flexibility, you have also have significantly less to pay before you finish off that debt.
Pay Off the Debt You Can’t Discharge by Discharging those Debts You Can
Often the most important and direct benefit of bankruptcy is it clears away most of your debts so that you can put your financial resources into the one(s) that remain.
In the example of the $18,000 IRS debt, let’s say the person also owes $30,000 in credit cards, $7,000 in medical bills, and a $5,000 deficiency balance on a repossessed vehicle. Discharging these other debts would both free up some of your money for the IRS and avoid the risk that those other creditors could jeopardize your payments to the IRS. Entering into a mandatory monthly payment arrangement with the IRS when at any moment you could be hit with another creditor’s lawsuit and garnishment only sets you up for failure.
But a Chapter 7 case would very likely discharge all of the credit card, medical and old vehicle loan debts. When you no longer owe those you would have a more sensible chance getting through an IRS payment arrangement.
Or a Chapter 13 case may require you to pay a portion of the credit card, medical and vehicle debts (often only a small portion, sometimes none) but in return you get the benefits of getting long-term protection from the IRS, a freeze on interest and penalties, and much more flexible payments.
Either way, you would much more likely succeed in becoming tax-free and debt-free, and do so in a reasonable time.